Performance of former Ontario premier as lead director at auto parts giant is "a joke," says shareholder rights advocate.

Mike Harris, lead director on the Magna International Board, has been criticized along with other directors for approving a $127 million pay package for six executives in 2010.

By:Tony Van AlphenBusiness Reporter, Published on Sat Apr 30 2011

A failure. An embarrassment. A joke.

In the bruising world of Ontario politics, opponents would sometimes hang those harsh criticisms on Mike Harris.

But the former premier is facing some of the same brickbats from shareholders such as the Ontario Teachers' Pension Plan, proxy groups like Glass Lewis & Co. and advocates of corporate governance over his performance leading the board at auto parts powerhouse Magna International.

Underlining their disdain, proxy advisers say Magna shareholders should snub Harris and other directors when their re-election comes up for a vote at the annual meeting next Wednesday. They have little regard for his expertise and the practical skills he acquired in governing the country's biggest province for almost seven years.

“It's an embarrassment to every corporate director who takes his responsibilities seriously,” said outspoken shareholder rights advocate Stephen Jarislowsky, about the work of Harris and other Magna board members . “It's a joke.”

It's not the first time that shareholders like the Teachers' pension fund will “withhold” their votes for the existing Magna board, primarily because the board approved huge annual pay packages to executive management.

Although Harris and the board have taken steps to improve Magna's corporate governance in the last year, criticism has increased along with the pay and bonus packages for a small group of executives.

Pay for directors also jumped dramatically. Harris collected almost three quarters of a million dollars for his part-time job in 2010. That's more than the total amount he earned in his last five years in the premier's office.

Furthermore, some directors, including Harris, remain under fire from institutional shareholders for not making a critical recommendation to shareholders last year about a major proposal affecting Magna's future.

On the pay issue, the board approved a stunning $127.53 million (U.S.) for six executives in 2010, including $60.1 million for company founder and chairman Frank Stronach.

Stronach, who built Aurora-based Magna into one of the world's biggest auto parts makers, will step down as chairman after the meeting and almost 40 years at the helm. But the 78-year-old entrepreneur will remain honorary chairman, a director and one of the largest individual shareholders.

Stronach's daughter Belinda, who resigned as executive vice-chairman at the end of 2010, collected $20.3 million.

That included $9.3 million for terminating a “business services agreement.”

In turn, Magna's seven independent board directors awarded themselves a whopping $2.9 million for their part-time work after receiving advice from a compensation consultant.

In calling for withholding support for the board, one proxy advisory group, Glass Lewis & Co., described the overall pay for the executives as “egregious,” “astonishing” and “oversized.”

Jarislowsky, a prominent investment fund manager, said Harris, and the other so-called “independent” directors have fallen fall short of meeting their obligations on dealing with executive pay practices and providing guidance on the stock reorganization last year.

“How can he claim he filled his fiduciary responsibilities,” he noted. “It's ridiculous.”

Jarislowsky, a senior fellow of the Institute of Corporate Directors, said his organization should “disown” Harris.

“They (the directors) should also all be turfed for not fulfilling their responsibilities,” he added.

Harris, one of the first corporate directors in Canada to gain certification from the institute, would not comment in an email to the Star about criticism of executive and board compensation or his work relating to the controversial proposal that changed Magna's capital structure.

Harris, who joined the Magna board in 2003, less than a year after resigning as premier, noted shareholders and a court approved the proposal. It ended control of Magna by the founding Stronach family after more than three decades.

“My only comment would be that their views on the deal and the process we followed are not shared by 75 per cent of our common shareholders or by the judge who approved the plan of arrangement,” Harris said in the email.

Harris, 66, sits on several boards and is a senior business adviser at the Bay Street law firm Cassels Brock & Blackwell LLP. His profile on the firm's website says he has “unique expertise in shaping public policy and managing stakeholder issues.”

Harris, who also heads Magna's corporate governance and compensation committee, received $749,710 in pay in 2010 as lead director. That was up $193,600 or almost 35 per cent from 2009. He took all of it in the form of stock last year.

His 2010 pay is more than what he received in total as premier during his last five years in office. It's also about $308,000 more than what David O'Brien collected while holding the job of board chairman at the Royal Bank, Canada's largest company.

Corporate governance expert Richard Powers said the huge compensation for a small corps of senior executives is not surprising in view of the company's history of high pay for top officials. But the amount for directors is unusual.

“I am not aware of any other board that pays its directors as much as Magna,” said Powers, a senior lecturer at the University of Toronto's Rotman School of Management and academic director of its directors education program.

Magna's annual circular shows Harris attended 25 board and committee meetings and 18 special sessions on the share reorganization proposal. Harris also headed the committee that handled the issue.

Those latter meetings involved work on the proposal whereby a Stronach family trust, which held only a tiny fraction of equity, would give up voting control in exchange for a $863 million in cash and common A shares.

Stronach also received “consulting” contracts for the next few years plus a stake in a Magna electric car subsidiary that would push the value of the final payout to almost $1 billion.

The Ontario Securities Commission later forced the company to provide shareholders with more disclosure, including how management and the board reached the payout for Stronach, which represented an unprecedented premium on his B stock of almost 1,800 per cent.

Powers said the committee and board may not have fulfilled their duties to shareholders in not making a recommendation on the proposal.

“Directors are paid to make decisions and some of them are difficult,” he said.

ISS Proxy Advisory Services, which supported the deal with Stronach because it would eliminate his control and improve corporate governance, also said the process was “flawed” since there was no “fairness opinion” from financial advisers or a recommendation from the board committee.

The proxy firm said the committee's decision not to advise shareholders was “unacceptable” and the directors “failed in their responsibility.”

In its critique of the committee, the Teachers' pension fund said the directors conducted “limited” negotiations with Stronach over the proposal and management led those talks.

“We do not believe the incumbent directors have appropriately represented the interests of the corporation or all of the shareholders, nor do have confidence they will do so moving forward,” said Teachers, which holds 737,802 Magna shares or less than 1 per cent.

They include a 6 per cent entitlement of total company profits for six executives; divergence from pay-for-performance formulas with temporary upward adjustments during the recession; the multi-million dollar consulting contracts with Stronach; reimbursements of life insurance premiums and use of corporate jets that turned into perks of more than $500,000 last year.

Glass Lewis raised some of the same issues in its report and concluded Magna's compensation philosophy “seems entirely flawed,” particularly big profit-sharing awards for top executives despite years of declining shareholder value.

“It appears to us as though the members of the (Magna) corporate governance committee continue to bend over backwards to overpay executives and have completely failed to serve shareholders in this regard,” Glass said in recommending shareholders also withhold their votes for all incumbent directors.

Although Stronach is no longer in control, it will be difficult for shareholders to reject Magna's directors under proxy voting in Canada at next Wednesday's meeting. Shareholders can vote “for” a director or “withhold” their ballots. That means directors can win their seats with little support.

While occasionally asking about pay at past meetings, shareholders have never mounted any serious challenge to the practices.

But among the board's initiatives to improve corporate governance, Magna plans to introduce “majority voting” in 2012. The concept would require directors to offer their resignations if they don't receive a majority of votes from shareholders in elections.

“It opens directors up for a more critical analysis of their actions,” said Powers. “Changes like this are intended to increase board accountability. In Magna's case, compensation for senior management is a flashpoint. The directors are also handsomely paid. Shareholders will have to determine whether they are getting value for their money in 2012.”

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